Average Senior Housing Cap Rate Inches Up

The average senior housing cap rate increased by 74 bps between April and October with non-core Class C Memory Care assets experiencing the highest increase, up by 89 bps to 10.5%, according to the 13th edition of CBRE’s Senior Housing & Care Investor Survey.

The survey was conducted in October 2023 and polled the same group of senior housing real estate professionals and investors in its most recent survey (April) and had a 98% response rate.

Core Class C Skilled Nursing assets had the smallest increase of 63 bps to 12.9% and Core Active Adult assets had the lowest average cap rate at 5.8%. Non-core Class C Skilled Nursing had the highest at 13.4%.

Many cap-rate metrics were consistent or essentially unchanged.

Generally, a high capitalization rate will indicate a higher level of risk, while a lower capitalization rate indicates lower returns but lower risk. That said, many analysts consider a “good” cap rate to be around 5% to 10%, while a 4% cap rate indicates lower risk but a longer timeline to recoup an investment.

The largest share of respondents reported cap rate increases of 100 bps over the past six months for all senior housing categories except Active Adult.

Cap rate spreads between asset classes were essentially unchanged except for Class C assets and assets in non-core locations.

Location spreads also remained consistent with the prior survey, except for Skilled Nursing, which had a material increase in spread for Class C assets in non-core locations.

The average spread between core and non-core assets was essentially unchanged.

Three-fourths of respondents reported cap rate increases of 50, 75 or 100 bps across all senior housing categories about one-third (31%) reported increases of 100 bps or more.

Rental rate increases of 3% to 7% over the next 12 months are expected by two-thirds of respondents regarding AA, IL, AL, and MC facilities.

Fewer respondents (15.6%) reported underwriting rent growth above 7% in the October survey compared to 21.5% in the April survey.

More than three-quarters of respondents (77%) expect rental rate increases of 3% or more over the next 12 months for all classes except Skilled Nursing.

Rent decreases were not reported by any respondents in any asset class.